Thursday, June 28, 2012

During the recent financial crisis and recession, construction and land development loans were the loan category that was most likely to become impaired.

For example, the FDIC reported that 12.52 percent of all construction loans were non-current as of March 2012 -- down from a peak of 16.82 percent, as of March 2010.

Since construction loans were more likely to become delinquent and be charged off, I thought it is worthwhile to identify those credit unions with the most construction loans.

The following table identifies the 25 credit unions with the largest amount of construction and land development loans as of March 2012. In addition, the table specifies what percent of total business loans at these 25 credit unions were construction and land development loans. The table does not include information on performance -- this will have to wait for a later posting.

The lawsuits allege the credit unions with unfair and deceptive practices. The complaints state that the credit unions manipulated the order of debit transactions from the highest dollar amount to the lowest dollar amount in order to maximize the amount of overdraft fees collected.

The lawsuits are similar to lawsuits targeting banks over their overdraft practices.

Friday, June 22, 2012

At a House Small Business subcommittee hearing yesterday, two credit union CEOs from institutions with about $2 billion in assets (larger than almost 95% of banks) testified regarding raising the credit union member business lending cap. These credit unions represent the few overly aggressive credit unions wishing to take advantage of their tax-exempt status and move further from their mandated mission of helping those of modest means.

These CEOs do not represent the majority of credit unions. Over 71% of credit unions do not make any business loans, and of those who do, most are not near the lending cap.

Further, their testimonies indicate that these credit unions are interested in making larger commercial loans ranging from $0.5 million to $3.8 million, not loans to small businesses.

Credit unions may already make business loans less than $50,000 without it counting towards their business lending cap. In addition, Small Business Administration guaranteed loans, many guaranteed at 85% of a loan amount, do not count towards the existing cap.

S. 2231 and H.R. 1418 will add to the federal deficit and disadvantage community banks. These bills will permit a few credit unions to cherrypick existing business loan customers from community banks—who pay taxes.

Ultimately, these bills would allow credit unions to look and act like banks without the obligation to pay taxes or have bank-like regulatory requirements, such as the Community Reinvestment Act, applied to them.

If some credit unions have outgrown their charter, they should switch to a bank charter.

Wednesday, June 20, 2012

Number of cities have either enacted or are considering enacting Responsible Banking ordinances.

These city ordinances would restrict municipal deposits to only those banks that provide detailed information on lending practices to low-income communities. If a city finds a bank (or possible even a credit unions) is not doing enough to provide credit to low-income residents, the financial institution could lose these municipal deposits and contracts for other services.

Raymond Natter at the law firm Barnett Sivon & Natter provides an interesting commentary about some of the public policy and legal issues that are raised by these local ordinances.

He notes that these city ordinances may be at cross purposes with the goal of the Dodd Frank Act to discourage risky lending.

Monday, June 18, 2012

As of March 31, 2012, there were 132 undercapitalized credit unions -- down from 138 credit unions as of the end of 2011. These 132 undercapitalized credit unions held a combined $7.48 billion in assets.

Friday, June 15, 2012

FDIC is disclosing these agreements as part of the information packet for closed banks. For example, here is the P & A agreement between FDIC, as the receiver of Waccamaw Bank, and First Community Bank.

Also, FDIC in some instances publishes a summary of the bids for closed banks. The bid summary would allow credit unions and the public to compare the winning bid against other bids. Here are the bid summaries for two recent bank failures -- Alabama Trust Bank and Palm Desert National Bank.

The publishing of the P & A agreement and the summary of bids for a closed credit union would make NCUA more transparent and would make the agency more accountable.

Wednesday, June 13, 2012

Below are several stories that I thought would be of interest. The first deals with checking account disclosure documents at the largest credit unions. The other story looks at an erroneous data leak of members' information from Bethpage FCU.

A New York Times blog, citing a recent Pew Charitable Trust report, noted that credit union checking account disclosure documents at the 10 largest credit unions had room for improvement. While credit union checking account documents are shorter than bank disclosures, the report found that credit union documents do not disclose information that would allow a customer to compare account fees, terms and conditions. The Pew Report also found that credit unions are prone to using confusing terminology making it difficult for consumers to compare accounts.

The Long Island Press is reporting that Bethpage Federal Credit Union erroneously posted for a month on the Internet limited personal and financial data of nearly 86,000 members The information that made it onto an unsecured website included members’ names, addresses, dates of birth, expiration dates of cards, checking and savings account numbers. But the leaked information did not include members’ Social Security numbers, PIN numbers or three-digit security codes. According to NewsDay, the leaked data was discovered by an employee's child doing a Google search on the child's name.

Tuesday, June 12, 2012

The Financial Stability Oversight Council (FSOC) issued a report on the actions taken by NCUA in response to the Government Accountability Office (GAO) study from earlier this year.

GAO made two recommendations.

1. To better ensure that NCUA determines the accuracy of losses incurred from the failure of the five corporate credit unions, GAO recommended that the Chairman of NCUA provide its Office of Inspector General (OIG) the necessary supporting documentation to enable the OIG to verify the total losses incurred as soon as practicable.

2. To improve the effectiveness of the Prompt Corrective Action (PCA) framework, GAO recommended that the Chairman of NCUA consider additional triggers that would require early and forceful regulatory actions. The GAO stated that the NCUA Chairman should make recommendations to Congress on how to modify PCA for credit unions, and if appropriate, for corporate credit unions.

The FSOC report notes that the NCUA has taken actions to promote the accurate and transparent valuations of the legacy securities from the five failed corporate credit unions and provides a range of total potential corporate resolution costs. The report states that NCUA has created the NGN Securities Management and Oversight Committee and contracted with BlackRock Solutions to provide well-documented cost estimates and to put in place a process to track and evaluate costs going forward. NCUA will make public its analysis on a semi-annual basis.

The FSOC report points out that "while there is significant uncertainty about asset performance, the credit union system’s combined net worth and ability to pay assessments far exceeds even the extreme upper bound of potential losses from the corporate failures. Therefore losses to taxpayers as a result of the resolution of the corporate failures are extremely unlikely."

In addition, NCUA agreed with GAO on improving the effectiveness of PCA and "supports research into indicators that may be able to better assist in identifying troubled institutions earlier and with more precision." The report states that NCUA has formed a task force comprised of NCUA and State supervisors to undertake a review of NCUA's PCA regulations, especially risk-based net worth component. The report notes that NCUA will monitor developments at the federal banking agencies as they consider enhancements to their PCA framework.

The more business you do with the credit union the better the deal you get with the credit union, including reduced loan rates, higher deposit rates and other benefits.

I understand that banks and credit unions are both fighting to gain a larger share of peoples' wallets and using relationship pricing is a way to gain more of that wallet.

But I believe this is an inappropriate use of the credit union tax exemption. The credit union tax exemption is tied to the credit union's mission of serving people of modest means.

However under this relationship pricing model, more of the tax subsidy goes to individuals that have higher balances with the credit union. These individuals with higher deposit and loan balances also tend to be wealthier and have higher incomes.

This is just another illustration of a misdirected tax subsidy and why the credit union tax exemption needs to be re-evaluated.

For the second time in less than a year, the board of Montana First Credit Union is asking its members to approve a proposed merger with Horizon Credit Union, a larger Spokane, Washington-based institution.

The first merger attempt was voted down in January by the members of Montana First Credit Union. But the boards of both credit unions reapproved the merger plan this spring.

The results of the vote will be disclosed at a special meeting on June 26.

I guess the boards of the two credit unions are following that old adage -- if at first you don't succeed, try, try again.

Thursday, June 7, 2012

The rule limited charitable contributions or donations by a federal credit union (FCU) to nonprofit organizations located or conducting activities in a community in which the FCU has a place of business, or to organizations that are tax exempt under §501(c)(3) of the Internal Revenue Code and that operate primarily to promote and develop credit unions. The rule further required an FCU’s board of directors to approve charitable contributions based on a determination that the contributions are in the FCU’s best interests and are reasonable given the FCU’s size and financial condition. Under the rule, directors could establish a budget for charitable donations and authorize FCU officials to select recipients and disburse funds.

Now, any FCU can make donations without the prior approval of its board of directors and without regulatory restrictions as to recipients. This represents a 180 degree change in position for the Board. NCUA previously commented it was “not convinced that this exemption should apply to all credit unions. The donation of a credit union’s members’ money to an outside party is a highly sensitive issue.”

This decision by the NCUA Board grants credit union management a huge amount of discretion as to recipients and the size of contributions or donations.

However, in some instances, the interests of management with regard to donations will not align with the interests of their owners/members.

While credit union boards should not micro-manage charitable donations, the boards need to adopt policies on charitable contribution including the amount that can be donated and criteria for recipients.

This will ensure that credit union management is accountable to its members rather than seeking to maximize their own satisfaction.

Tuesday, June 5, 2012

The Kansas Credit Union regulator is reminding Kansas chartered credit unions to follow the rules when it comes to member business loans.

According to an article appearing in the Wichita Eagle, examiners from the Kansas Department of Credit Unions found that several credit unions were not following the NCUA's member business loan regulation.

The bulletin issued by the department highlighted some of the business lending provisions that examiners noted were being violated.

Monday, June 4, 2012

The National Credit Union Administration reported that credit union assets surpassed $1 trillion for the first time in the industry’s history.

Assets grew by 4.2 percent during the quarter to $1,001.8 billion. Deposits (shares) jumped by $38.6 billion to $866.0 billion and credit unions added 667,000 members. However, loans at federally-insured credit unions were largely unchanged – inching up by $532.5 million to $572.0 billion. First mortgages, used vehicles loans, and non-federally insured student loans increased during the quarter, whil other lending products such as credit cards, unsecured loans, and other real estate loans fell. As a result, the loan to deposit ratio at credit unions fell during the quarter from 69.07 percent to 66.05 percent.

Credit unions posted a profit of $2.1 billion during the first three months of 2012 on lower interest expenses and reserving for loan losses and an increase in other operating income. The industry’s return on assets was 0.84 percent – 17 basis points higher than year-end 2011 levels.

Credit union net worth increased by $2.1 billion to $100.3 billion. However, the net worth ratio for credit unions fell by 20 basis points to 10.1 percent, as assets grew faster than net worth. This was the first deline in the net worth ratio in a year.

Credit union reported an improvement in asset quality as both delinquencies and charge-offs declined during the first quarter. Delinquent loans fell by from $9.1 billion at the end of 2011 to almost $8.25 billion at the end of the first quarter. The industry’s delinquency ratio dropped 16 basis points to 1.44 percent.

Net charge-offs fell from $1.3 billion for the fourth quarter of 2011 to $1.1 billion for the first quarter of 2012. As a result, the net charge-off ratio fell 13 basis points to 0.78 percent.

Saturday, June 2, 2012

USA One National Credit Union (USA One), located in Matteson, Illinois was closed by the Illinois Division of Financial Institutions on May 31, 2012 due to inadequate capital.

Credit Union 1, of Lombard, Illinois purchased all of USA One’s loans and other assets and assumed all of its share account liabilities.

USA One reported total assets of $38 million as of March 31, 2012 and served 8,000 members. At the end of 2011, the credit union reported a loss of almost $1.2 million and had delinquent loans of $3.5 million.

The California Department of Financial Institutions decided to liquidate Telesis Community Credit Union and discontinue its operations after determining the credit union was insolvent and had no prospect for restoring viable operations on its own. Telesis Community's financial difficulties arose from commercial real estate loans that had gone bad.

The California Department of Financial Institutions had placed Telesis Community Credit Union into conservatorship March 23, 2012.

At the time of liquidation and subsequent purchase and assumption by Premier America Credit Union, Telesis Community Credit Union served approximately 37,600 members and had $301.3 million in assets.

Shareholders of Monadnock Community Bank of Peterborough, New Hampshire approved the sale of the bank to GFA FCU in Gardner, Massachusetts.

Under the terms of the sale, GFA will pay $6.4 million to acquire the bank. This will be the second transaction where a credit union has acquired a bank; but the first deal involving a stockholder-owned bank.

About Me

Dr. Keith Leggett is retired from the American Bankers Association, where he was a Senior Vice President & Senior Economist. He is a leading expert on credit unions and the National Credit Union Administration.

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